Ben Horowitz is a co-founder of the venture capital firm Andreessen Horowitz. Prior to being a venture capitalist, he co-founded Loudcloud, a managed services provider which became Opsware, a data center automation software provider. He is the author of The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers. Horowitz earned a BA in Computer Science from Columbia University in 1988 and a MS in Computer Science from UCLA in 1990. On his blog Ben suggests that if you want to learn more about him you read his entry in Wikipedia.
1. “You read these management books that say ‘these are the hard things about running a company’. But those aren’t really the hard things.”
“My old boss Jim Barksdale said that most management consultants have never managed a hot dog stand.”
“Wartime CEO is too busy fighting the enemy to read management books written by consultants who have never managed a fruit stand.”
“When I was a CEO, the books on management that I read weren’t very much help after the first few months on the job. They were all designed to give you directions on how not to screw up your company. But it doesn’t take long before you get beyond that and you’re like OK I’ve screwed up my company; now what do I do? Most books on management are written by management consultants, and they study successful companies after they’ve succeeded, so they only hear winning stories.”
People who write about management tend to follow a formula that Michael Mauboussin has described: “The most common method for teaching business management is to find successful businesses, identify their common practices, and recommend that managers imitate them.…This formula is intuitive, includes some compelling narrative, and has sold millions of books. [The reality is that] attributing a firm’s success to a specific strategy may be wrong if you sample only the winners.…When luck plays a part in determining the consequences of your actions—as is often the case in business—you don’t want to study success to identify good strategy but rather study strategy to see whether it consistently led to success.” Ben Horowitz decided to write a different sort of book that rejects the approach described by Michael Mauboussin in favor of a reality-based approach. He decided to write about what he calls “the Struggle” which is “basically what you feel like when your world is caving in.”
Ben Horowitz adds to the point made by Michael Mauboussin by saying, you can do things recommended by these books like setting a “big, hairy, audacious goal” and still have the business flounder. What do you do then? Running a business isn’t the equivalent of a well-planned garden party. As my late friend Keith Grinstein told me years ago, once a business gets beyond the planning stage: “stuff breaks.” Things will go haywire at unexpected times and places. And when that happens, having great managers who have the ability and willingness to adapt pays big dividends.
2. “Management turns out to be really dynamic and situational and personal and emotional. So it’s pretty hard to write a formula or instruction book on it.”
“There isn’t one lesson that solves everything.”
“Any advice you give is based on your [experience]; it’s not general advice. People try to generalize it — and I try to generalize it, too — but without knowing where it comes from it’s not nearly as useful.”
“Nobody is born knowing how to be a CEO. It’s a learned skill and unfortunately you learn it on the job.”
“The only thing that prepares you to run a company, is running a company.”
When a CEO is engaged in the Struggle there are no formulas to follow. Being a CEO is like being an investor in that experience can’t be simulated. In both cases you learn by doing, just as everyone else who has come before you.
Having said that, just because the skills required to be a successful CEO must be learned on the job doesn’t mean that you can’t learn something by observing another CEO. For example, Ben Horowitz had the opportunity while working at Netscape to observe Jim Barksdale who many people I know feel is one of the best CEOs of all time. Ben has identified Bill Campbell and Ken Coleman as having been his mentors. There are no formulas to follow in being a CEO, but you can still learn things like the types of decisions that a CEO must make to be a success by looking as what other CEOs have done. For example, one conclusion I have reached over several decades of working with different CEOs is that the best CEOs are not cut from the same mold. Each CEO I have encountered in my life has had different strengths and weaknesses, but the really great CEOs all know how to surround themselves with people who complement their weaknesses. I have no way of knowing whether the strong supporting cast surrounding the CEO in any given case arrived mostly due to luck. But without exception they all had a great supporting team around them. As another example, some CEOs use profanity and some don’t, some yell sometimes and some don’t, but all of them are effective communicators in their own way.
3. “In reality companies are what they are and nobody has ever worked anywhere where everything is perfect. And so pretending that things are perfect isn’t actually very effective.”
“I don’t know that I’m drawn to conflict; you don’t necessarily in these businesses want conflict with other companies, though you get it a fair amount. But, and this is one of the best management pieces of advice I ever got from Marc Andreessen: he was quoting Lenin, who was quoting Karl Marx, who said: ‘sharpen the contradictions.’ Marx was talking about labor and capital, which is not generally what you’re talking about when you’re running a company. But the conflict is where the truth is. And so when there’s a conflict in the organization, you do not want to smooth it over. You want to sharpen the contradictions, heat up both opinions, and resolve it. Good CEOs are really good at doing that. And it’s miserable to work for someone who tries to smooth things over.”
The key words in this set of quotes from Ben Horowitz are “conflict is where the truth is.” Every business and almost everything in life is not perfect. Identifying the things that should be changed to improve a business is fostered if you identify conflict and work to resolve it. Hiding conflict causes problems to fester and grow. Here’s Ben again: “You do not want to smooth over conflicts. You want the conflicts to surface and you want to resolve them. If you don’t, you have got problems. If you do surface and resolve them you will be a pretty good manager.”
4. “When a company goes astray, you talk to employees and they say, ‘We have no strategy. We don’t know where we’re going.’ The strategy is the story. They’re not different. The strategy is the story you tell. It’s the why. If you can’t tell that in a massively compelling way, who’s going to follow you? That’s what makes people get up in the morning and do stuff.”
“The story must explain at a fundamental level why you exist. Why does the world need your company? Why do we need to be doing what we’re doing and why is it important?”
“You can have a great product, but a compelling story puts the company into motion. If you don’t have a great story it’s hard to get people motivated to join you, to work on the product, and to get people to invest in the product.”
“The mistake people make is thinking the story is just about marketing. No, the story is the strategy. If you make your story better you make the strategy better.”
“Storytelling is the most underrated skill.”
In Ben’s view the CEO and founders must own the story of the business. It is their responsibility to keep it up to date and compelling. The CEO and founder’s task is made easier by the fact that humans love a good story. Because they often have trouble understanding or remembering ideas and instructions, stories help people stay on track and motivated. It is important to emphasize that Ben Horowitz is making a point here about strategy, which as Michael Porter points out, is driven by what a company does differently than its competitors. The story must convey what the business does that is uniquely valuable and how that will create a sustainable competitive advantage (a moat).
As an example of the importance of a story, I had a conversation recently with a person who is a venture capitalist and owns a winery. We agreed that when talking about an industry in which the story is key to the product, wine should be font and center. The terrain, the grapes, the winemaker etc. are all about story telling. Many people seem to enjoy the story of the wine more than the wine itself, or at least the former drives the latter. The food television personality Andrew Zimmern said once: “Food tastes good. Food with a story tastes better.” Of course, that is mostly a statement about marketing. Ben Horowitz believes that the story should drive the strategy. For example, how will the wine business run their business in a unique ways that creates a moat? How can it create sustainable differentiation in what is a very competitive industry? What can be done to create barriers to entry in the part of the market the winery has decided to serve?
5. “Thinking for yourself …the distinguishing characteristic of the great entrepreneurs.”
“The trouble with innovation is that truly innovative ideas often look like bad ideas at the time.”
“Innovation is almost insane by definition: most people view any truly innovative idea as stupid, because if it was a good idea, somebody would have already done it. So, the innovator is guaranteed to have more natural initial detractors than followers.”
Founders who deliver great new value to the world think differently. That value comes from believing or recognizing something as true that other people do not see. The founders are inevitably breaking one important assumption that others have made. AirBnB is a classic example of founders thinking differently. Ben’s partner Marc Andreessen said once that the conventional wisdom about AirBnB was to ask things like: “People staying in each other’s houses without there being a lot of axe murders?” Great founders and CEOs don’t outperform the market by following the crowd. As is the case with investing, it is mathematically impossible to follow the crowd and perform better than the crowd.
No one puts it better than Howard Marks: “To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them – ideally all three.” Not only must the founder and CEO occasionally be contrarian, but they must be sufficiently right about a contrarian view in a way that drives outperformance. In measuring outperformance it is magnitude of success and not frequency of success that matters. The best way to be a successful contrarian is, as Ben Horowitz points out, to think for yourself. Being a contrarian by definition means that you must be prepared to sometimes be lonely with respect to some of your views. Thinking differently separates you from the warmth of the crowd.
6. “People say that the CEO should be ‘the best salesman at the company’ or the ‘product visionary’ or all these things. No. The CEO is the CEO. They’ve got to deliver very quality decisions at a very high rate of speed. And if they don’t make a decision, the company freezes up. In order to do that, you need to be talking to everybody. You need to figure out what’s going on with your finance people, and your engineering people. Because by the time this s–t comes to you, you won’t have time to do that. You won’t have time to make your decision.”
The ability of a person to make timely and wise decisions is the mark of a great CEO. As an analogy, the best defensive baseball players are standing there waiting for the ball when it arrives. They are already in great position before the ball is hit. Great business decision makers similarly are ready to make decisions when the time comes because they have done the necessary preparation. That preparation allows them to make timely and more accurate decisions. Charlie Munger talks about this same idea in investing. Most of the time Charlie Munger is reading and thinking. He is getting ready to act quickly and aggressively when the time comes. It looks like nothing is happening but the reality is that Munger is working hard to be ready when the right time arrives. When Charlie Munger makes an investment he has been preparing to make that investment for a long time. He knows the business and the market. Great managers are prepared and ready to act, standing in just the right place when the equivalent of the baseball drops into their glove.
7. “Sometimes an organization doesn’t need a solution; it just needs clarity.”
“Often any decision, even the wrong decision, is better than no decision.”
Not making decisions is, of course, making a decision – as is not making a decisions quickly and decisively. Too often the answer executives provide a company when faced with a decision is like the old joke about the psychiatrist who asks his patient if he has trouble making decisions? The patient says, “Well, doctor, yes and no.”
I have a friend who is a venture capitalist and one day, during a press interview in his office he was asked by a journalist, “What is the secret of your success?” He said, “Two words.” “And, what are they?” asked the journalist. “Right decisions.” “But how do you make right decisions?” asked the journalist. “One word,” he responded. “And, what is that? Asked the journalist” “Experience.” “And how do you get experience?” “Two words.” “And, what are they?” “Wrong decisions.”
A related common problem is that sometimes, when we are presented with several options, they may blind us to other choices — including the simplest and most sensible one. During a visit to a psychiatric hospital, a visitor asked the doctor how they determine whether or not a patient should be institutionalized. “Well,” said the doctor, “We fill up a bathtub, then we offer a teaspoon, a teacup and a bucket to the patient, and ask them to empty the bathtub.” “I see,” said the visitor. “A normal person would use the bucket because it is bigger than the spoon or the teacup.” “No,” said the doctor, “a normal person would pull out the plug. Do you want a bed near the window?”
8. “The primary thing that any technology startup must do is build a product that’s at least ten times better at doing something than the current prevailing way of doing that thing. Two or three times better will not be good enough to get people to switch to the new thing fast enough or in large enough volume to matter.”
“If you don’t have winning product, it doesn’t matter how well your company is managed, you are done.”
The essence of business is to cost-effectively acquire a customer. The greater the value delivered by the business, the less time and money that will be required to sell the product or service. Given that humans suffer from inertia, it takes a compelling value to get people to switch to a new product or service. If you pay too much for sales and marketing to acquire that customer you can quickly (or slowly) go broke. In a customer lifetime value model too much acquisition costs can be fatal. Sam Altman puts its simply: “Be suspect about buying users.” The better approach is to have customers who are attracted by a better product or service.
9. “Figuring out the right product is the innovator’s job, not the customer’s job. The customer only knows what she thinks she wants based on her experience with the current product. The innovator can take into account everything that’s possible, often going against what she knows to be true. This requires a combination of knowledge, skill, and courage.”
The famous relevant Steve Jobs quote is, of course: “It’s really hard to design products by focus groups. A lot of times, people don’t know what they want until you show it to them.” If something is going to be 10x better the product or service is going to need to be different than what the customer has seen before. A “me too” product or service is not going to move the needle for a startup.
10. “There are only two priorities for a start-up: Winning the market and not running out of cash. Running lean is not an end.”
“The only mistake you cannot make is running out of cash.”
Several times in this blog series I have quoted Harold Geneen as having said: “The only unforgivable sin in business is to run out of cash” but it is such an important point that it is worth repeating. Earnings are an opinion. Cash is a fact. Should a business spend every penny wisely? Absolutely. But don’t run of out of cash. Is equity dilution something to be avoided? Sure. But don’t run out of cash. Can too much cash cause a business to solve problems with money rather then culture? Yep, but don’t run out of cash. Can innovation be greater when a company has less capital on hand? Yes, but don’t run out of cash. Oh, and did I mention: don’t run out of cash. Horowitz and A16Z have a helpful guide to raising funds here.
11. “What do you get when you cross a herd of sheep with a herd of lemmings? A herd of venture capitalists.”
“The most important rule of raising money privately: Look for a market of one. You only need one investor to say yes, so it’s best to ignore the other thirty who say ‘no.’”
The best venture capitalists think for themselves just like the best CEOs think for themselves. Anyone who is paying attention knows that venture capital is a cyclical business. This results for the same reason as economic cycles happen: people do not make decisions independently. Venture capitalists who do think independently generate better financial returns. For example, the best venture capitalists have left social media focused startups when the hype cycle hits its peak but then may circle back once the poseurs are gone. Bargains are most often found where others are not looking, particularly when it comes to the optionality that drives venture capital returns.
Founders who are raising money must keep in mind that venture capital firms commit errors of omission all the time. Many venture capitalists passed on Uber and AirBnB and other big financial successes. That they pass on your pitch does not mean you will not find success with another firm. No one knows for sure which investments will succeed. Raising money requires that you have a thick skin. People who successfully raise money never give up. A great example of this from Ben’s own life was the so-called “IPO from Hell” when LoudCloud raised funds in a market that many believed was dead. The Wall Street Journal noted that on March 8, 2001 LoudCloud had “just completed a backbreaking, initial public offering road show that landed (Horowitz) in 70 meetings in 16 days with moneymen scattered across North America and Europe.” They may have been the last tech IPO out the door in that cycle but they got it done and that was what mattered.
Ben and Marc also raised funds for their first a16z fund in 2009 – which was not an easy time to raise money. A journalist wrote about that time period: “in a market where LPs are fastidiously avoiding new VC fund commitments, I’m a bit amazed that LPs would consider placing a $250 million bet on a first-time fund with this type of profile.”
12. “All the returns in venture capital go to a tiny number of firms and the same firms every year….this is not true in mutual funds or hedge funds or anything else. You don’t have persistent returns across decades.”
I have raised this topic in several of my posts including on Marc Andreessen and Fred Wilson. Some people go as far as to say that venture capital can’t really be an asset class if the difference between the top 10 venture capital firms and the bottom quartile of venture capital firms reflects a power law (the argument is that the difference in financial returns is too great to group them together; considering a16z, Benchmark, Sequoia etc. with firms in the bottom quartile of venture capital performance is apples and oranges). What this means as a practical matter for a founder is that whether you are able to raise funds from one of those firms will have a great deal to do with whether you are successful. Why? Path dependence. Potential employees, investors, consumers and distributors take cues from previous success in making decisions. Past success in this way feeds back on itself, and the best firms get the best results in a distribution of income that reflects a power law.